Zhu Min or China's Faustian IMF-Lagarde Bargain

In Chinese, gweilo (鬼佬) is a traditional epithet against "foreign devils" that, due to its common use, has lost much of its condescending tone. Indeed, Westerners often describe themselves as such in the PRC to deflate suspicion about themselves. Today, however, we have a potential Faustian bargain with the many (sorry) gweilo who run international financial institutions that may see to it that China sticks the knife into its fellow LDCs when it comes to the matter of IMF succession. Merde!--as Lagarde might exclaim in her less guarded moments.

I've just attended a very interesting talk by Yves Tiberghien who should be familiar to those interested in Asian political economy. This particular presentation concerned China's G-20 role. As you all know, my lost cause of the moment (I have many) is someone from an LDC becoming the next IMF chief to succceed the now-infamous Dominique Strauss-Kahn. We are down to two candidates, France's Christine Lagarde who's favoured by the Europeans and Mexico's Agustin Carstens who's favoured by a handful of Latin American countries. Supposedly, China is still considering throwing support behind Carstens (someone must be chosen by month's end). From our favourite official publication, China Daily:

Agustin Carstens, governor of the Mexican central bank, said on Thursday that China promised to take his bid to be the first non-European managing director of the International Monetary Fund (IMF) seriously and that the Chinese government is in the process of making a final decision.

After making a quick visit to China, Carstens told a press briefing in Beijing on Thursday that he has held "very fruitful" discussions on his candidacy with his Chinese counterpart Zhou Xiaochuan and with Finance Minister Xie Xuren. He insisted that his position as a non-European will be an advantage in the race and that his experience in Latin America will be particularly useful because the IMF position should be filled by an expert in crisis management.

I have to put this down as a (fairly likely) rumour, but the word in policy circles according to Yves Tiberghien is that the die is already cast. The primary interest of China at this time is to get one of its own in a high-ranking position within striking distance of becoming IMF managing director (that is, deputy managing director #2 or #3). So, when this post becomes open once again, he will be well-placed to become the first IMF head from an LDC. Which, I must point out, is also Carstens' strategy--while he may not win this time around, he is hoping to garner enough name recognition to be the front-runner next time.

Instead, China is placing its bets on Zhu Min. He has been the deputy governor of the PBoC and was a special advisor to Strauss-Kahn before the latter's ignominious fall. In fact, the China Daily article continues to allude to this desire of the PRC:

"Carstens' trip to China may be of little use because the country will probably endorse Lagarde," said Guo Tianyong, economist at the Central University of Finance and Economics. He said Lagarde's proposal is in line with China's interests, and that her gathering of wide support will influence China's decision.

To win over China to her candidacy, Lagarde said she supported the decision to increase China's voting rights at the IMF from about 4 percent to nearly 6.4 percent. She also said Zhu Min, the former deputy governor of the Chinese central bank and the current economic adviser to the IMF managing director, should play a more significant role in the fund.

China now being the IMF's second largest contributor, the supposed deal goes like this: the PRC will throw its weight behind Lagarde for the top post, but it expects the Europeans to do the same with a deputy managing director post for Zhu Min:

While the competition for the top slot is becoming fiercer, there is also a jostle among candidates wanting to occupy a deputy-managing director post. That has drawn much attention from Chinese analysts, who believe a Chinese has a better chance at obtaining that position. "It's time for China to recommend a Chinese to be deputy managing director, or even acting managing director of the fund," Guo said. "Zhu Min's experience is well qualified for that position."

Sun Lijian, deputy dean of the School of Economics at Fudan University, said Zhu Min has a good chance at winning the position. "It is very natural that a Chinese person should be in that post, because China has performed well in the financial downturn and contributed a lot to the world economy, which is well recognized throughout the world," Sun said.

He added that the weak recovery of the US and European economies will make the IMF prefer to raise more capital from China and other emerging economies. "Zhu Min's position as deputy head looks logical, especially since China is already the second-largest economy in the world," Sun said. "European countries should give their full support."

Has China sold out its third world colleagues for the sake of its own interests? I certainly hope Tiberghien is mistaken, but I doubt that he is.

UPDATE: Also see Sebastian Mallaby in Foreign Affairs on the question of IMF succession.

Belarus is Forever IMF's (Unfaithfully)

[NOTE: It's been a long time since I've had a semi-trademark sing-along post, so without further ado, here's one.] With apologies to Journey:

Currency run, amid plunging sums
Debts go round and round
IMF's on my mind...

One of the most insightful books I've read concerning the remarkable durability of anti-developmental regimes is Nicolas van de Walle's African Economies and the Politics of Permanent Crisis, 1979-1999. Why is it that so many regimes are able to cling to power despite providing so little in terms of delivering a higher standard of living? Foreign Affairs provides a cogent summary of this book's main idea that international lenders inadvertently keep this situation going:

Then, in a devastating analysis of international aid programs, [Van de Walle] demonstrates how Western donors and lenders, including the World Bank and the International Monetary Fund, have systematically if unwittingly undermined the institutional capacity of African states to manage reform and growth. Nondevelopmental regimes, he argues, have thoroughly mastered the art of bait and switch, swallowing just enough reform medicine to keep aid flowing but not enough to end the "permanent crisis" of underdevelopment. Entrenched patterns persist even in states that have undergone promising democratic regime change. Genuine economic transformation, Van de Walle hypothesizes, ultimately depends on fundamental political changes that must come from within; meanwhile, the present aid regime remains counterproductive.

From here let us turn to a decidedly nondevelopmental regime in Belarus. Fresh from receiving emergency IMF funding at the end of 2008 when the global financial crisis was in full swing, it is once again lurching from one bad situation to another.

At present, Belarus has next to no foreign exchange reserves. It has a current account deficit that's 16% of GDP. Its currency has been devalued by 36% in an attempt to stave off the inevitable. In a little over two years, it has once again sought IMF support. You would think that such terrible economic stewardship would have ejected strongman Alexander Lukashenko by now. But no. As in many African nations, Belarus has its own version of the politics of permanent crisis that, contrary to what you would expect, may only serve to secure his position as it has in the past. Despite obvious financial mismanagement, Lukashenko manages to stay in power by keeping some semblance of reform.

Note that Belarus is also approaching Russia for emergency funding, though Russia is keen on promoting state asset sales before lending that one suspects would ultimately benefit Russian interests. Hence the IMF is oddly more attractive at present to a leadership keen on keeping its possessions intact. Conversely, you wouldn't expect the IMF to force privatizations given the criticisms it endured during the Asian financial crisis. End result? Don't expect Lukashenko to go despite everything. If push comes to shove, there's still Russia even with its "conditionalities":

Belarusian opposition members whose family members and colleagues have been sentenced to years in prison for protesting elections said a worsening economy may not herald the end of President Alexander Lukashenko’s regime. “If the economy crashed, Lukashenko wouldn’t have to turn to the West -- he could turn towards Russia instead,” Andrey Dmitriev, who was chief of staff for presidential candidate Vladimir Neklyaev in the run-up to the December 19 elections, said in an interview in Warsaw.

Despite a misfiring economy largely of his own making, Lukashenko is blaming foul play to eject him:

The IMF has warned the country must curtail spending, raise interest rates and liberalize its managed exchange-rate system as foreign reserves slide and the current-account deficit soared to 16 percent of gross domestic product.

Lukashenko, in an April 21 speech, said there were “efforts to spur panic buying in the foreign exchange and consumer markets, with the assistance of domestic and foreign analysts.” “It’s obvious that someone is eager to destabilize the country, and sow chaos and distrust of the government, and after the problems that ensue could later strangle our country and our independence,” Lukashenko said.

What has happened in the arena of international politics? The IMF team which descended on Minsk recently as Belarus cried for help noted that the problems which beleaguered the country a few years ago that necessitated IMF help remain unresolved:

What should be in the plan? The origins of the crisis lie in excessive credit growth and wage increases that the economy could not afford. The solutions lie in the same places [my emphasis]. The National Bank should restrain credit and money creation. This means limiting credit under government programs and increasing interest rates to at least the level of the expected rate of inflation, so that people can be confident that their savings are not being eroded. The government should reduce the fiscal deficit-—we would recommend bringing the budget into balance—-and should not increase government wages this year. It should also discourage large state enterprises from increasing wages. We know that prices are going up, and it is hard to manage without wage increases. But high wage increases will just drive prices even higher and the rubel lower in a vicious spiral.

The foreign exchange market is not working. Very few people are willing to sell foreign exchange at the official rate, and most people who want to buy foreign exchange have to pay for it at a much more depreciated exchange rate. We recommend floating the exchange rate—-allowing the official exchange rate to be set by market forces and allowing free trade in both the interbank market and the cash market.

Then there are the specific politics of permanent crisis wherein Belarus does just enough to keep the IMF sticking around and not abandoning it altogether:

The main purpose of this mission has been to assess the authorities’ economic policies. We have been pleased with some of the economic measures the government is taking [my emphasis]. The government is doing a good job in limiting the budget deficit and in setting limits to lending under government programs. We also welcome the government’s plans to help people who are unemployed and who are poor and are suffering from the effects of the crisis. We also welcome some of the steps the National Bank has taken, including increasing policy interest rates and the recent decision not to provide commercial banks with cheap loans to support their lending under government programs. But we think that both the government and the National Bank need to do more to promote economic and financial stability.

We have also initiated discussions on a possible IMF program. This has only been the beginning of our discussions and we still have a long way to go. We need to have further negotiations on macroeconomic policies. We will also need to agree on structural reforms to improve the efficiency of enterprises and the financial system so that in future growth will be strong and durable. Above all, the authorities have to be committed to macroeconomic stabilization and structural reforms. We will have to agree on strong stabilization and structural measures which would be implemented prior to the program and would demonstrate their commitment. The IMF staff will continue to work with the government and the National Bank to reach a strong agreement which would help the people of Belarus.”

And so the familiar cycle is set to begin anew: same problems, same actors, same prescriptions. Meanwhile, in the absence of real institutional reform--the sort of which should really come from Belarus' citizens instead of from IMF conditionalities--I remain pessimistic that the circle will be broken. Not that such action is likely forthcoming; when even Russian state media says so, you know Belarus is in deep trouble. If' I'm still blogging in a few years' time, I suspect that I'll be writing about very much the same things as Belarus heads for yet another crisis. These are not called the politics of permanent crisis for nothing.

It's a fine line: when does lending with conditionalities become intrusive a la the augmented Washington Consensus? Should encouraging regime change in cases such as Belarus be an objective of emergency lending? There's a path to negotiate between prodding a country in a desired direction and interfering with its internal affairs. Lest we forget, there's also Russia willing to help out; perhaps China as well that gives similarly short shrift to attaching strings concerning governance matters. Push too hard and the likes of Belarus may avoid IFIs altogether. Heaven knowns modern-day Russia and China have money to burn.

Somehow I'm sure the IMF doesn't look forward to the joy of rediscovering, er, Belarus.

Cyber Attack: Hacking Into the IMF

Being rather underwhelmed about former IMF Deputy Managing Director and current Bank of Israel Governor Stanley Fischer going for the top job (has holds both US and Israeli citizenships), let's talk about IMF hacking instead of Asian financial crisis-era dinosaurs. These sorts of attacks are usually said to emanate from China or Russia, so you have to wonder: in theory, what exactly do these FX reserve-heavy nations have to gain from hacking into the IMF? Certainly there is not much for them to gain with respect to themselves in terms of preparing for IMF responses to balance-of-payments crises which are unlikely to befall them.

To me, there are no obvious attractions here for hackers: this entity does not hold consumer financial data or corporate proprietary information. Then again, Russia which always keeps tabs on its neighbours might value more information on the conditions of recent IMF clients Belarus and Ukraine, or to a lesser extent Hungary or Latvia. That for borrowers aside, proprietary information may not be all that unique insofar as Article IV consultations are always publicly released despite often being quite massaged. Go figure. Whodunit?

But in the case of the I.M.F., officials declined to say where they believe the attack originated — a delicate subject because most nations are members of the fund. The attacks were likely to have been made possible by a technique known as “spear phishing,” in which an individual is fooled into clicking on a malicious Web link or running a program that allows open access to the recipient’s network. It is also possible that the attack was less specific, a case in which an intruder was testing the system merely to see what was available.

The BBC also has some footage on the hacking attack. Verging on the improbable, maybe China is curious as to whether the time is nigh for mounting a palace coup in providing the largest share of IMF funding. In that case, IMF headquarters would be headed for Beijing, remember. Or less outlandishly, perhaps the PRC, another country, or a group of countries is interested in further understanding processes of succession?

Christine Lagarde Answers Your Questions

OK, let me get this out of the way: I hold French Finance Minister Christine Lagarde in high regard, but chafe at the notion of her becoming the next IMF managing director. Do we need another European head when international financial institutions are striving to be in touch with the times when the world's economic centre of gravity is heading eastward? Also, do we need another French person heading another global or regional governance body when we already have WTO Director-General Pascal Lamy, Jean-Claude Trichet at the ECB, and a recently departed Dominique Strauss-Kahn? While the French are skilled diplomats, of that there's no doubt, it's way too much already.

Anyway, while reading a new WSJ article about her attempting to garner support in China and India--both remain noncommittal at present but surely would be even less likely to back Mexico's Agustin Carstens (the IPE Zone pick)--I read that she is quite handy with social media (or maybe her assistant[s] are). Given that many of my incoming links now come from Twitter and Facebook than from other blogs, I am not particularly surprised. Indeed, her skilled use of social media is now being touted as no small advantage. For the curious, she is soliciting questions today from the likes of you and me regarding her IMF bid:

Ms. Lagarde will also take questions on Twitter and Facebook on Thursday as she seeks every possible outlet to bolster her campaign. Readers of her Twitter feed and fans on Facebook can send in questions before the session officially begins at 1 p.m. ET Thursday. "An hour is not a long time!" her Facebook page says, adding she personally will answer the questions.

Ms. Lagarde has tweeted around 70 times to her burgeoning band of followers during her tour of emerging economies. "India seems willing to consider my candidacy," she tweeted Wednesday, despite no clear official backing from India's government after meetings with Ms. Lagarde in New Delhi. The meeting with India's Prime Minister and Finance Minister, who invited Ms. Lagarde to lunch, was "very friendly," she tweeted.

On Friday, Ms. Lagarde will meet African officials during an African Development Bank Conference in Portugal, before travelling to Saudi Arabia and Egypt on the weekend. Her choice of Twitter to keep up links to the rest of the world as she travels may turn out to be a savvy one.

At any rate, do visit her Twitter and Facebook accounts even if you don't raise questions. In addition to being a globetrotter pressing the flesh, the opponent is a cunning new media operator!

Fiscal Studliness: IMF Lauds UK's Macho Austerity

A few months ago, I commented on the little girlie man wussonomics emanating from America. If anything else, the free lunch economics that brought the joys of subprime crisis to the rest of the world was, er, magnified by even looser (the spellcheck suggests "loser"; it's pretty smart) fiscal and monetary policies in its wake. As if free money has done Americans any good since then: stock market indices have dropped for five consecutive weeks, job growth is next to non-existent, housing prices are scraping post-recession lows. As Dear Leader Dubya would say, good job, Bennie and Timmy! It's done these deficit deniers no good while adding to their already orgiastic debt load. You call that progress? Only in America.

Let's face it: today's Americans are not used to adversity. The "ask not what your country can do for you, but what you can do for your country" idea is long gone as America is busy flushing itself down the toilet of history. In spite of their irresponsible behaviour, these louts are quite angry, blaming everyone and everything else--even giving God a 33% approval rating. It's never their fault, is it?

In contrast, a previous post of mine also compared how the UK is following a stricter path of austerity. While some British observers alike celebrity chef and "Tiger Dad" Jamie Oliver detect increasing American-style wussiness in British youth, my general impression is that the British retain some of the famous stiff upper lip. While there certainly are crybabies here, the general public still appears to know that free lunches don't exist except in the land of Cheneynomics and other benighted reality-free places (except for "reality TV," that is).

Now we have the IMF performing its annual Article IV consultation on the United Kingdom and giving it a clean bill of health or something which comes close. So inflation is running a tad high and growth a bit low compared to expectations. I personally would advocate raising interest rates in the UK. At any rate, you can read the IMF's statement which says the show must go on and the UK must stay the macroeconomic course which is a totally alien concept to certain deficit lubbers across the Atlantic:

Aided by the implementation of a wide-ranging policy program, the post-crisis repair of the UK economy is underway. However, the weakness in economic growth and rise in inflation over the last several months was unexpected. This raises the question whether it is time to adjust macroeconomic policies. The answer is no as the deviations are largely temporary. Strong fiscal consolidation is underway and remains essential to achieve a more sustainable budgetary position, thus reducing fiscal risks. The inflation overshoot is driven largely by transitory factors, and hence maintaining the current scale of monetary stimulus is appropriate given fiscal adjustment and subdued wage growth. This macroeconomic policy mix will also assist in rebalancing the economy toward investment and external demand. Bank balance sheet repair continues, but vulnerabilities remain and strong domestic measures and international coordination are needed to further bolster financial stability. Indeed, the stability and efficiency of the UK financial system is a global public good due to potential spillovers and thus requires the highest quality of supervision and regulation. Nonetheless, there are significant risks to inflation, growth, and unemployment. If they materialize, the policy response will depend on the nature of the shock.

Now that's a manly response to crisis. The WSJ and FT have more, but you get the general idea. Let's face it: some folks just have bigger huevos than others. This coalition's not for turning? I sure hope so. After all, there's no plan B.

Divided We Fall: Mexican Agustin Carstens' IMF Bid

[NOTE: I highly recommend reading Agustin Carstens' manifesto for an LDC IMF head before moving on.] Although you may occasionally get the feeling that I'd happily back boxing legend Julio Cesar Chavez as the next IMF managing director, let's just say I am more a fan of third world solidarity than most of the rest. Following up on my previous post about a lack of LDC unity on the matter--aside from rhetoric (only) pointing toward consideration of an LDC IMF chief, we have a really sad case on our hands here.

As I trod through the lonely road of lost causes, let me just say that Banco de Mexico Governor Agustin Carstens would have been my choice for the post among declared candidates in the running to be the next IMF managing director. He certainly has the qualifications as a former IMF deputy managing director. As Mexico's central bank governor, he too has overseen the transformation of an economy that, in previous decades, suffered from chronic balance of payments crises. Nowadays, foreign investment is flooding into the country as the peso--that former symbol of chronic devaluation--is becoming positively muscular.

So what's the problem? Well again, there's next to no backing from other LDCs. Uruguay aside [?!], nobody has indicated support for Carstens despite him going on a roadshow to garner support:

Mexican central bank Governor Agustin Carstens, nominated to lead the International Monetary Fund, criticized European nations for publicly backing French Finance Minister Christine Lagarde before all the candidates are known. “I find it strange that they are advocating in some forums for an open, transparent, merit-based candidate and they have made up their minds before the candidates are on the table,” Carstens, 52, said in an interview today in Sao Paulo. “All the other countries are playing by the book.”

Carstens, who has won a single public endorsement abroad, from Uruguay, said he expects emerging markets to support his candidacy once there is a final list of nominees to serve as the IMF’s next managing director. He met with his counterpart from Brazil today before traveling to Buenos Aires in a bid to rally support among developing countries for his candidacy.

Still, there is hope that while he isn't yet a name to rival Christine Lagarde among the central banker / finmin crowd, he is building name recognition so that he will be the front-runner when Lagarde or whomever European candidate gets the nod steps down.

While Carstens’ campaign is unlikely to succeed, his strong credentials as a former IMF deputy managing director are impossible to overlook and may advance his bigger goal of giving emerging markets more say in how the world economy is run, Guillermo Le Fort, a former IMF economist from Chile, said in a telephone interview. “Carstens is making a principled stand,” Le Fort, who was also a director on the IMF’s board for Chile and five South American nations from 2000 to 2004, said. “If he’s successful in advancing the cause of emerging markets, the Europeans might feel red in the face and decide to hold more honest, open elections based on merit in the future.”

Any of the IMF’s 187 member nations has until June 10 to nominate candidates for the managing director’s position, the fund said in a May 20 statement. The IMF executive board, which will select a managing director by June 30, is aiming for consensus rather than a majority vote, according to the fund.

And as the title says, divided we fall, although Carstens may be wily in thinking longer term:

Emerging economies that advocate a merit-based selection process appear unlikely to break Europe’s hold on the top job because so far they have been unable to rally around a single candidate, Arturo Porzecanski, a professor of international economics at American University in Washington, said. “The likes of Brazil, Russia, China, India will not support one another -- never mind Mexico,” he said in a telephone interview June 1. “Emerging countries are not being supportive.”

Carstens’ trip is similar to that of a political campaign designed to gain support in emerging countries for his bid, Morris Goldstein, senior fellow at the Peterson Institute for International Economics in Washington, said in a May 31 telephone interview. Carstens’ meeting today in Sao Paulo with central bank President Alexandre Tombini followed a meeting yesterday in Brasilia with finance chief Mantega. He’ll be traveling to Ottawa after Buenos Aires to promote his candidacy.

Brazilian officials and Carstens share the view that IMF needs to continue to reform and give developing markets more representation, the Mexican official said. “What is clear is that we have very similar views on the challenges and the solutions that need to take place in the institution,” said Carstens about his meeting with Tombini.

Carstens could be building his reputation for a successful future run if his bid for the IMF top job fails this year, Kevin Gallagher, associate professor of international relations at Boston University, said in a telephone interview June 1. “He’s trying to carve out a space for emerging markets and let people know who he is,” Gallagher said. “He’s all of a sudden become a household name in this community. Maybe five years from now the world will think that maybe it will be Carstens’ turn.”

To be sure, Carstens’ campaign isn’t necessarily doomed, according to Goldstein, who was an IMF official for 24 years. “It’s a matter of whether he can get support first of all in the rest of the emerging market world,” he said. “If he were able to unite the emerging markets, he would have a real chance.”

It's put up or shut up time. Unfortunately, it seems LDCs are squandering a perfectly good opportunity with a more than viable candidate to break the US-Europe stranglehold on Bretton Woods institutions. It's a shame--a real shame.

Read My BRICs: No New French IMF Chiefs!

Coming from a developing nation, I am a long-time follower of third world solidarity movements. The Non-Aligned Movement, the G-77 and the New International Economic Order (NIEO) are to me high points of South-South cooperation even if the results of their activities have often been muted. For many posts now, I have been agitating for a non-Western IMF chief alike what has been promised by Americans and Europeans for the longest time [1, 2, 3]. Or at least prior to Dominique Strauss-Kahn's--how do I put it--questionable extra-curricular activities. Certainly, it's time for the West to let the rest of us have a say in international economic governance if the system is truly a liberal institutional order. After all, the eastward shift in economic gravity is pronounced.

Yet, it is observably true that LDCs--particularly the major developing ones--are not as united as the Europeans are behind French Finance Minister Christine Lagarde taking over the top slot at the IMF. LDCs themselves fight over many things such as Brazil taking a dim view of China's currency policy or engaging in bikini wars. So, observers take the point of view that while developing countries agree on "anyone but another European" (or American for that matter), they don't have a single unity candidate alike Europeans backing Lagarde. Instead, they have squabbled over uniting behind a particular candidate, preferring to put forward their own nationals' names. So, unlike Europe, they fail in consolidating their voice. Remember: united we stand, divided we fall at the IMF.

To compensate, the representatives of the Brazil, Russia, India, China and South Africa (BRICs+ ?) have together put forward a position statement. While not entirely getting behind a candidate, as mentioned above, it's a positive step that they are at least seeing eye to eye on the need for diversity during a critical succession period:

We, as Executive Directors representing Brazil, Russia, India, China and South Africa in the International Monetary Fund (IMF), have the following common understanding concerning the selection of the next Managing Director of the International Monetary Fund:

1) The convention that the selection of the Managing Director is made, in practice, on the basis of nationality undermines the legitimacy of the Fund.

2) The recent financial crisis which erupted in developed countries, underscored the urgency of reforming international financial institutions so as to reflect the growing role of developing countries in the world economy.

3) Accordingly, several international agreements have called for a truly transparent, merit-based and competitive process for the selection of the Managing Director of the IMF and other senior positions in the Bretton Woods institutions. This requires abandoning the obsolete unwritten convention that requires that the head of the IMF be necessarily from Europe. We are concerned with public statements made recently by high-level European officials to the effect that the position of Managing Director should continue to be occupied by a European.

4) These statements contradict public announcements made in 2007, at the time of the selection of Mr. Strauss-Kahn, when Mr. Jean-Claude Junker, president of the Euro group, declared that “the next managing director will certainly not be a European” and that “in the Euro group and among EU finance ministers, everyone is aware that Strauss-Kahn will probably be the last European to become director of the IMF in the foreseeable future”.

5) We believe that, if the Fund is to have credibility and legitimacy, its Managing Director should be selected after broad consultation with the membership. It should result in the most competent person being appointed as Managing Director, regardless of his or her nationality. We also believe that adequate representation of emerging market and developing members in the Fund’s management is critical to its legitimacy and effectiveness.

6) The next Managing Director of the Fund should not only be a strongly qualified person, with solid technical background and political acumen, but also a person that is committed to continuing the process of change and reform of the institution so as to adapt it to the new realities of the world economy.

It's a highly qualified statement, yes, but I am generally on board with the argument that maintaining a US (World Bank)-Europe (IMF) stitch-up of international financial institutions is certainly not conducive to evolving patterns of economic activity. Now, if only these developing countries could unite behind a single candidate, then the contra-Lagarde will be more of a reality than a theoretical persona.

The time is now. Don't take any more excuses and get it done. And certainly, LDCs can show great displeasure come voting time. Meanwhile, Eswar Prasad urges the major developing economies to act quicker in response to this European attempt to do an end run on the selection process:

The Brics are pushing hard for a competitive vote with more than one viable candidate, rather than just a pro forma process intended to confer legitimacy on the presumptive winner. There is a brief window of opportunity for emerging markets to make their point, even if they lose this round of the battle. To grab it, they must quickly up their game.

Japan and the US are the swing votes. They have restated support for a transparent and merit-based process, and have not taken sides yet. But neither wants the outcome to threaten its own privilege of appointing a deputy managing director. Therein lies an opportunity.

Emerging markets must first unify around one candidate. Each of the big players has its own agenda, so picking a candidate from among them may be a hard sell within the group itself. Augustin Carstens of Mexico has already thrown his hat in the ring and there are other excellent candidates from “neutral” countries, like Tharman Shanmugaratnam from Singapore, who could step into the breach.

Second, they must ensure China’s support by pushing to elevate Zhu Min, the highest-ranking Chinese representative at the fund, to a new, fourth deputy managing director position. Third, they must strike a bargain with Japan and the US to support them retaining their own deputy managing director positions for the next five years. Fourth, their candidate should draw up a clear list of governance reforms and a plan for acting on them to line up support from other developing economies.

This approach may seem mercenary. But it is time for emerging markets to shed the grand vision of pure merit-based selections and get down to the bare-knuckled politics that Europe is practising. This is not just in their own interests but also for the greater good of an institution that is now central to global financial stability.

I agree that "merit-based" selection is the stuff of pseudo-technocratic BS: this is raw international politics at the beginning of the 21st century. May the newer entrants prevail over the old order. While Lagarde presents herself as a candidate for diversity in being the first putative female IMF managing director, it's not necessarily the burning issue at the moment to be fair.

Bedsides, who's to say that there's a shortage of female LDC candidates for the job? How about Sri Mulyani Indrawati--formerly Indonesia's finance minister and currently the World Bank managing director? Figuratively speaking, the ultimate sacrifice in the service of third world solidarity may be the BRICs+ choosing a unity candidate outside their citizenry but also from a large LDC that looks like a force to be reckoned with--Indonesia.

LDCs Strike Back: The Coloured Man's IMF Burden

Before getting to the topic at hand, let me point out Desmond Lachman of the AEI and his scathing indictment of Dominique Strauss-Kahn's performance as IMF managing-director--but without offering an alternative. From my vantage focusing on global governance, this much is clear: the "mistake" of Dominique Strauss-Kahn was favouritism toward Europe by granting Greece, Ireland, and now Portugal access to IMF funds meant for balance of payments troubles for what were, in essence, fiscal woes. Is this prudent lending? You first have to consider if the IMF should have lent to these countries at all. Latvia, Ukraine, Hungary, Iceland, Pakistan, etc. definitely had BOP woes so I have no issue with their borrowing. Lending to the abovementioned EU states genuinely rankles me, however.

That said, recent events have forced us to reassess the future of leadership at the IMF and the World Bank a bit further down the line when Robert Zoellick's term ends. In my previous post on the white man's IMF burden, I pooh-poohed the argument that European dominance at the IMF should be continued given current circumstances in peripheral EU economies. And now the cavalry has arrived to back me up, by which I mean the major developing economies. Hence the current post title lacking originality.

Let us consider the 500-pound gorilla of China weighing in on the issue. Just today, John Ikenberry--a name that should be familiar to nearly all IR scholars--launched his new book Liberal Leviathan at LSE IDEAS. It is a distillation of his longstanding conviction that the United States' relative decline is cushioned by the bedrock of liberal institutions it has established, including the IMF contemporaneously enough. Fortunately, I had the chance to ask him about IMF succession. To him, the Chinese leadership's statements on the matter demonstrate a continuing unwillingness to be more proactive in international institutions and "free ride" on others' work. Ikenberry further suggests that the careful wording is meant to possibly encourage an IMF chief from an LDC but save China from embarrassment if s/he is not. Anyway, here's what PRC Foreign Ministry spokeswoman Jiang Yu had to offer:

"We've taken note of this situation, and it would not be appropriate to further comment," ministry spokeswoman Jiang Yu told a regular news briefing when asked about the arrest of Strauss on sexual assault charges.

"You also raised the issue of the selection of the Fund's senior leadership. We believe that this should be based on the principles of fairness, transparency and merit."

To this observer, the "fairness" bit generally references the rising economic clout of LDCs and specifically their increased contributions to the IMF. After all, China now has the third most quota allocations in the IFI. At a broader Global South level, however, there is no sign of them uniting behind a single candidate to replace DSK. Given that it's early days, let's not make too much of this (yet):

Emerging nations have yet to unite behind a candidate to take over as the head of the International Monetary Fund, even as they reiterate their long-held stance that the position should not be reserved for a European. Brazil and South Africa have expressed a desire for an end to the tradition of the IMF’s managing director’s job going to Europe, just as they oppose the convention that the head of the World Bank is always an American.

Chile and China also have said that the position should be filled “on merit”, without publicly putting forward any candidates themselves. The likely resignation from the IMF of Dominique Strauss-Kahn, now in jail in New York pending the hearings of charges of sexual assault against him, has brought the sensitivities surrounding the job to the fore.

For many emerging countries the sinecures at the top of the World Bank and the IMF symbolise the old order established after the second world war, which they argue is no longer representative of the global economy.

South Africa and India certainly have viable names, but they are not tooting their horns too loudly at the moment:

In South Africa, Pravin Gordhan, finance minister, said Europeans “must be alive to changes in the world”. Mr Gordhan floated the name of Trevor Manuel, who was a long-serving finance minister in South Africa and who is now head of the national planning commission, calling him “highly respected in the world”.

India has been more cautious on possible changes in the leadership of the IMF, making little public comment on the management of any succession. Montek Singh Ahluwalia, the influential deputy chairman of the planning commission, has sought to damp speculation that he could be a possible candidate for the position of IMF chief. “I am not putting my name forward for any of these things,” Mr Ahluwalia, a former senior official at the World Bank and IMF, said. “I am quite happy with what I am doing and I am not looking for a change.”

To me this is a no-brainer: all change at Bretton Woods institutions to LDC heads is long overdue given that Europeans have always headed the IMF while Americans the World Bank. Are the demonstrated leadership qualities of Dominique Strauss-Kahn and, er, Paul Wolfowitz really that great? Nuff said.

UPDATE 1: TIME has a pretty good take on the succession topic, too.

UPDATE 2: Obviously, I have no problem with Dani Rodrik championing Kemal Dervis for this post, though he must be kidding if the French and Germans would consider him as "European" in justification.

The White Man's IMF Burden (Merkel Edition)

As expected, jockeying for the appointment of the next IMF managing director has begun. In an odd twist on the American deficit lubber's argument that medium-term fiscal consolidation is a desirable objective but not one in the near term since the US is just recovering from a deep recession, we have Europeans offering the same. Here, Europeans who still hold voting rights out of proportion with their share of the world economy claim that while medium-term diversity among heads of Bretton Woods institutions is a desirable goal, it shouldn't happen immediately given the pressing woes of peripheral European economies Greece, Ireland, and Portugal.

Again, I must point out my longstanding objection that the IMF is primarily meant to handle balance-of-payments crises, not fiscal ones alike those being experienced by the troubled trio. What is more, I am not alone in sensing fairly blatant favouritism that is hampering IMF reform to reflect the changing global balance of economic activity as well as a simple misallocation funds. Why should poor countries' IMF contributions be used to assist rich countries that don't really qualify for assistance as per the IMF's articles of agreement concerning BOP difficulties? The IMF shouldn't be a pet EU institution. But enough righteous indignation; here are the Europeans on this issue:

Mr Strauss-Kahn’s arrest on sex charges at the weekend prompted some commentators to declare it may be an opportunity for emerging market countries to take charge of the multilateral lender. But European officials on Monday asserted their case for keeping the top job for a European, as is customary, with Angela Merkel, the German chancellor, leading the charge. Ms Merkel told reporters on Monday that finding a replacement for Mr Strauss-Kahn was “not a question for today”, but given the sovereign debt crisis on the eurozone periphery there were “good reasons” to propose a European candidate...

Didier Reynders, the Belgian finance minister, argued on Monday that “it would be preferable if we continued to hold these posts in the future”.

It becomes a question of, first, to what extent will developing countries protest the continuation of the (neocolonial, perhaps) status quo? Second and based on LDC reactions, to what length will Europeans go to preserve the unwritten tradition of appointing a European head? Various commentators have suggested the Europeans will strike a deal with the Americans who've traditionally appointed the World Bank president to keep things as they are--you scratch my back, etc. Either way, I predict a fight on our hands if history repeats itself:

The comments by Ms Merkel and Mr Reynders suggest that Europe will fight to maintain the tradition at the two institutions. The number two job at the IMF, held by an American, will also become vacant soon when John Lipsky, who is running the fund in Mr Strauss-Kahn’s absence, steps down at the end of August.

Emerging market countries argue that it is unacceptable for Europe and America to continue to stitch up the top jobs even as developing nations take a growing share of the global economy.

However, even European countries that were willing to consider an emerging markets candidate for the IMF this time are having second thoughts now that the fund is central to short-term European interests. Ms Merkel said that developing countries had a right to the top jobs in the “midterm”.

Just as you don't cure American debt addicts by continually providing their fix, so you shouldn't expect Europeans to change their ways by embedding outmoded habits even further. The time of Turkey's Kemal Dervis or a similarly qualified LDC candidate is long overdue. Certainly, you can't say developed nations have an automatic right to lead the IMF by virtue of their superior economic management in this day and age.

Repairing the Adulterated IMF Post-Strauss-Kahn

I wonder what our colleagues at the Bretton Woods Project would make of this. Before going to sleep last night, I caught news that IMF Managing Director Dominique Strauss-Kahn was held in New York en route to France on attempted rape charges [1, 2]. Having written about the big kahuna's peccadilloes before, this latest episode will probably surprise Americans more than those of us in Europe who've become accustomed to these sorts of allegations against DSK. Yet, alike with the Monica Lewinsky allegations, the magnitude of these claims invites initial disbelief. This news story has even topped Yahoo! News. When the IMF only receives popular coverage when an event like this happens, you know that it has a problem with getting the public to understand what it does as well as with the kind of attention it receives. Pick your news outlet of choice: it may be a slow weekend, but DSK is front-page on nearly every one.

Much comment has already been made about the incident. While innocent until proven guilty is the operating principle, you can certainly argue that this incident has damaged DSK's credibility mortally. There are of course many implications here:

1. His chances of being the Socialist Party standard-bearer for next year's French election against the UMP's Nicolas Sarkozy are now nugatory. Various polls have claimed that he led Sarkozy at various points in the run-up to 2012. Though he probably did not foresee the extent of it, offering DSK as IMF managing director was a Sarkozy masterstroke in neutralizing a potential rival on the domestic political scene. Segolene Royal partie deux, mon ami?
2. In his place, American First Deputy Managing Director John Lipsky--formerly of JP Morgan and a securitization cheerleader in his earlier days [1, 2]--takes control. This certainly isn't the outcome most of us wishing for more diversity in IMF leadership want. However, this is mitigated by Lipsky indicating that he will step down at the end of August. Fancy that: a guy most clearly associated with promoting securitization prior to the crisis now has to deal with the fallout from their abuse and misuse.
3. On the bright side, the unlikely return of DSK and the stopgap term of Lipsky will put to test IMF indications of reform (including from DSK himself) to make it reflect the world's changing centre of economic activity. Your truly will certainly hold it to account in choosing its next chief from a developing country instead of the unbroken tradition of having a European head and an American #2. Given the buildup in previous years, I can certainly assure you that developing countries will cause a ruckus if it doesn't happen this time around. All change at the top is long overdue.
   
4. A non-European head would still come too late to limit IMF "mission creep." I have written on why the IMF should not bail out Greece, Ireland and Portugal since the primary causes of their crises were not balance-of-payments difficulties which the IMF was designed to address. Hopefully, an LDC chief would resist calls from rich Western countries to misallocate funds meant for aforementioned BOP crises--especially contributions from LDC members. If the EU wants to bail out its own, fine, but don't use monies set aside for other purposes at the IMF.
   
5. DSK was already becoming antsy about Greece's similarly socialist leaders not living up to their end of the bargain. With this rapport now ended, the IMF's already limited powers of persuasion in keeping Greece in line will probably take another knock. Ironically, Sarkozy's efforts to keep EU bailouts a European affair will likely suffer a blow from his fiercest rival effectively discrediting himself via nasty entanglements. The IMF/EU/ECB troika with the possible exception of the ECB has taken its lumps. but is not terminally damaged to the point of not being able to work alongside each other.
   

Personal factors aside, IMF prescriptions will likely not change under whatever new leadership it will have in a couple of months. It may have eased somewhat on high neoliberal orthodoxy during his time in charge--especially when friends in high places rather than low places got in trouble--but conditionalities are still there that are quite harsh for the rest. Ask Greece. Still, one hopes that an LDC chief can signal a more truly cosmopolitan outlook for the organization in composition while returning to its core mission of handling BOP crises.

As for le grand seducteur, some people just want to party all the time. DSK is a socialist in the way Super Mario is a communist, and his hankering for the good life looks to have terminally ended his future political prospects. But hey, loving the limelight, he can always become an Eliot Spitzer-esque talking head.

UPDATE 1: The NYPD making DSK do the perp walk shows a good amount of confidence by the authorities in their case.

UPDATE 2: Yahoo! News now features three stories on the case. Is this a case of misplaced priorities or something else? You know something is up when the IMF shares top billing with the world's best known if deceased terrorist.

PM Cameron to Block Gordon Brown Heading IMF?

The House has noticed the Prime Minister’s remarkable transformation in the last few weeks from Stalin to Mr Bean...Creating chaos out of order rather than order out of chaos - then-UK Shadow Chancellor Vince Cable on Gordon Brown in November 2007

Poor Gordon Brown. During the early years of New Labour, he was widely considered a master of public financial management. He famously coined the so-called golden rule of fiscal policy that over the economic cycle, the UK will borrow only to invest and not to fund current spending. In other words, net borrowing must be close to zero during an economic cycle. Of course, many pounced on this notion as problematic. How do you define an "economic cycle" being the most obvious question left unanswered.

The global financial crisis put paid to the golden rule rhetoric in a way that the later Blair years were already beginning to hint at. Tight-fisted control of the public purse? You must be joking. It's Brown's misfortune to come into office when a dramatic deterioration of public finances due to bailouts, eroded revenues, etc. began to take their toll. However, while Gordon Brown's reputation lies in tatters here in Britain, he may still be better received in Washington among the global financial elite. After once being mooted to be an IMF managing director, he still has not formally said "no" to the idea.

In the past day on the BBC's Today radio programme, current PM David Cameron was asked if he would endorse Gordon Brown as the next IMF managing director given that its current head, Domonique Strauss-Kahn (DSK), is widely believed to be heading home to France next year to be the Socialist Party's standard bearer against Nicolas Sarkozy.

I made a post sometime ago--Stupid European Tricks, I called it--on how this system works in Europe. Leaders here are often keen on allowing rivals from other parties to gain key posts in international institutions, thereby removing them from domestic politics. Think of Silvio "Bunga Bunga" Berlusconi allowing Romano Prodi to become the EU commissioner. Or, think of Nicolas Sarkozy encouraging the aforementioned DSK to become the IMF managing director.

Given that Gordon Brown is pretty much a spent force in the UK, we actually have PM Cameron discouraging the idea of Brown heading to Washington (not that he asked for it, but anyway.) With Brown more or less silent on the Westminster scene, there is no benefit for Cameron in giving a former rival a chance to rehabilitate his reputation elsewhere. Churlish? You decide. From the Evening Standard:

Gordon Brown's hopes of heading the International Monetary Fund were dealt a serious blow as David Cameron indicated he was ready to block his predecessor's appointment to the role. The Prime Minister said Mr Brown was not the "most appropriate person" to take over as managing director of the IMF because he failed to understand the dangers of excessive debt.

His intervention raised the prospect of a UK veto amid heightened speculation that Mr Brown is emerging as a leading contender to take over from Dominique Strauss-Kahn who is deciding whether to be the socialist candidate in the French presidential elections next year...

But, asked whether he would veto the move, Mr Cameron said: "I haven't spent a huge amount of time thinking about this but it does seem to me that, if you have someone who didn't think we had a debt problem in the UK when we self-evidently do have a debt problem, then they might not be the most appropriate person to work out whether other countries around the world have debt and deficit problems."

Encouragingly, Cameron is aware of the world economy's changing centre of gravity and says it's time we broke with the convention of choosing a European to head the IMF (and an American to do the same for the World Bank?):

Speaking on BBC Radio 4, the Prime Minister suggested that the IMF should look to "another part of the world" for its next leader in order to increase its global standing...If you think about the general principle, you've got the rise of India and China and South Asia, a shift in the world's focus, and it may well be the time for the IMF to start thinking about that shift in focus," he said.

"Above all what matters is: is the person running the IMF someone who understands the dangers of excessive debt, excessive deficit? And it really must be someone who gets that rather than someone who says that they don't see a problem."

To be sure, the Bretton Woods institutions have backed away from strict neoliberal strictures on fiscal prudence when the financial centres they came from went astray. Review IMF Chief Economist Olivier Blanchard when rich countries instead of poor countries ran into trouble during the global financial crisis. You know the excuses: their margin of error is higher, markets are more forgiving of them, their status as reserve currency issuing countries helps, the balance of risks today is different, etc.

So, in a post-crisis IMF, Brown's later American-style spending spree and implicit deficit denial may not be entirely out of place. Then again, how would you push the austerity message on others given his track record? At any rate, the FT avers that Brown is not even one of the top candidates for the predicted IMF job opening [1, 2] but a host of other European financial bigwigs. Christine Legarde? Too many French in international institutions IMHO.

It's too speculative for me at the moment, and I for one would fully endorse an LDC successor to DSK wholeheartedly. We can all hope, eh?

UPDATE: An audio clip of the interview is available from Auntie.

LDCs to IMF: Shove Yer Capital Control Guidelines

Boys and girls, here's an interesting development as we rejoin the currency wars. Sometime ago, I discussed the Strauss-Kahn era IMF warming up to the idea of capital controls--at least in certain situations deemed unusual such as excess speculative inflows or too-rapid currency appreciation. Most likely, this warming up is attributable to IMF-organized research which finds that capital inflows are negatively associated with economic growth. According to Messrs Prasad, Rajan, and Subramanian:

Taken at face value, our results suggest that there is a growth premium associated with reduced reliance on foreign finance-—though we do not have strong evidence to suggest that this is a causal relationship. The reliance of nonindustrial countries solely on domestic savings to finance investment comes at a cost, however. There is less investment and consumption than there would be if these countries could draw in foreign capital on the same terms as industrial countries.

So, have we embarked on a new era where the IMF grants LDCs much-vaunted "policy space" in setting up capital controls when they believe they're warranted? Er, no. In fact, the IMF has been trying to get LDCs to agree to a set of guidelines which make capital controls a "last resort" after other avenues have been exhausted. At the recently held World Bank/IMF Spring Meetings, capital controls were among the main topics on the agenda of updating the IMF's global monitoring role. You may take the IMF's inability to get these LDCs to play along at the current time as another demonstration of America's inability to get its preferences across via international financial institutions. From the WSJ:

Representatives of emerging nations rebuffed an International Monetary Fund plan to guide them on managing huge flows of capital into their economies, viewing it as a way to constrain their actions rather than help. The IMF's policy-steering committee, at its spring meeting over the weekend, responded by effectively delaying the plan, which would influence the use of capital controls—tools such as taxes and restrictions on foreign investment. The committee agreed to study the issue more in coming months [translation: shelve it for now].

The IMF's recent endorsement of capital controls marked a reversal in its longstanding opposition to limits on the free flow of capital around the world. IMF officials had come to acknowledge emerging markets' need to curb surging inflows, which can fuel asset bubbles and inflation and hurt domestic exporters by driving currency values higher. The IMF's plan would have encouraged nations to treat capital controls as a last resort, after they had first tried use other tools, such as policies on interest rates, currency values and government budgets.

But ministers of developing economies resisted vehemently, viewing the proposal as an effort by advanced economies to hamstring their policies. Brazil, Turkey, South Korea and several other developing countries have adopted capital controls over the past year to limit surging inflows. "We oppose any guidelines, frameworks or 'codes of conduct' that attempt to constrain, directly or indirectly, policy responses of countries facing surges in volatile capital inflows," Brazil's finance minister, Guido Mantega [of international currency war fame], told the IMF's steering-committee meeting.

The fight over capital controls comes amid a continuing battle over who is to blame for the flood of capital flowing primarily from sluggish advanced economies into faster-growing developing countries. Developing countries blame the U.S. Federal Reserve, in particular, as a fountain of excess capital because it is holding short-term interest rates near zero and pumping money into the economy by buying government bonds. Developed countries trace the problems primarily to China's policy of tightly controlling its currency's value, and also to the tendency of investment capital to flow to the economies with the fastest growth.

The IMF committee directed the fund to study the issue with more focus on the sources of capital inflows. Mr. Mantega called capital controls "self-defense" measures. "Ironically, some of the countries that are responsible for the deepest crisis since the Great Depression, and have yet to solve their own problems, are eager to prescribe codes of conduct to the rest of the world, including to countries that are overburdened by the spillover effects of the policies adopted by them," he said in a statement to the policy committee.

That's one version of the story. Here's the American take:

U.S. Treasury Secretary Tim Geithner called the IMF proposal a "good start." He blamed the currency policies of countries such as China, saying they drive capital into economies with freer exchange rates. "A few emerging markets run tightly managed currency regimes, deploying extensive capital controls and accumulating excess reserves well beyond precautionary levels," he said. "This asymmetry magnifies capital flows into emerging markets with open capital accounts, heightening upward pressure on exchange rates that are flexible and fueling inflation in economies with managed, undervalued exchange rates."

The IMF had opposed capital controls for decades. Nations employing them risked criticism from the fund, spurring resentment from some members who feared a stigma from investors or other nations. But the IMF stance has shifted in recent years amid huge volumes of "hot money," or short-term flows, into many economies.

The LDCs have a valid point: if an orgy of liberalization, deregulation, and privatization did not bring America to the promised land--it look quite pitiful from where I stand--who's to say that others should follow its example? Indeed, America's recent return to deliberalization, reregulation, and nationalization--same with many other industrialized economies--contradicts its stance on what LDCs should adopt.

I'd say "shove yer capital control guidelines, white man" is an understandable response to this characteristically hypocritical American behaviour as its free-money policies cause LDCs misery through higher energy prices, food prices, etc. The US ain't got no street cred on these matters; I wonder why.

Like Greece & Ireland, IMF Shouldn't Help Portugal

Now I'm hopping mad! I know that I'm beginning to sound like a broken record on this, but in the interest of fairness, I will fight the good fight even if no one else will do so. Bravely I must soldier on in this bleak and unbearable world. Previously, I have argued that the IMF should not have bailed Greece out because its problems were primarily of the fiscal sort (accumulating a debt too large to service), not the balance-of-payments sort (having insufficient foreign exchange to pay for necessary imports like food and energy).

I've also said that bailing out Ireland was an indecent financial proposal since its woes stem primarily from the state guaranteeing its banks' solvency without fully realizing the magnitude of such commitments. Insofar as the IMF remains an institution dedicated to dealing with balance of payments problems, we have an identical main problem with IMF lending to Ireland and Portugal. While theirs are somewhat dissimilar woes, what they have in common with Greece is not having a BOP problem which would oblige the IMF to act according to its Articles of Agreement.

Even the IMF describes its activities in Ireland as support for recapitalizing nearly insolvent lenders which have, in turn, tested the solvency of the Irish state. Witness:

Ireland’s banks are at the heart of the current crisis. Massive lending during the boom years left banks heavily exposed to the Irish property market, which has yet to stabilize despite a steep fall in housing prices of 36 percent since the peak in 2008. At the height of the boom, the assets of domestic banks amounted to five times Ireland’s gross domestic product, with real estate loans making up close to 30 percent of all loans in 2006.

Such an oversized banking system is no longer sustainable, not least because of the ongoing weakness of the property market in Ireland. The problems have resulted in a loss of deposits and market funding, and have made Irish banks overly dependent on financing from the European Central Bank. The banking sector therefore needs to be restructured and recapitalized.

There isn't even an allusion to balance of payments woes, precisely because Ireland doesn't suffer from them.

And so it is the case once more with Portugal. Sharing a common currency with its main trading partners in the Eurozone, the euro is also a standard global reserve currency that is second only to the US dollar in terms of reserve holdings. But Portugal may have trouble obtaining euros, you say? As late as February, the ECB had a facility for purchasing sovereign issuances which it used to help out Portugal. So, Portugal could have just issued more IOUs and sold them to the ECB:

The European Central Bank has intervened in eurozone bond markets for the first time in weeks, buying Portuguese debt amid fears that the country could yet seek an international rescue. The ECB returned to the market on Thursday as Portugal’s cost of borrowing on 10-year debt jumped to a euro-era high of 7.63 per cent, traders said. The ECB temporarily suspended its bond-buying programme in mid-January.

The real triggers for Portugal asking for help from the European Financial Stability Facility (EFSF)/IMF are a nuber of things. First, the outgoing PM Jose Socrates failed to pass austerity measures, displeasing powers-that-be in Brussels who had hoped Portugal could avoid another massive bailout episode. Absent political leadership (Socrates resigned and there will be parliamentary elections come June 5) and a credible plan for getting its fiscal woes under control, the ECB inevitably tired of purchasing Portugese debt as a lifeline and asked Lisbon to formally ask for help. Financially, servicing EUR 10B of maturities due in June is virtually impossible. Hence the cry for mercy.

My argument in the Portugese case is similar to the Greek one: In the main, fiscal woes--overindebtedness--is to blame, not BOP problems. Although the IMF may be giving its support to Eurozone countries to help quell systemic disturbances in the international monetary system, that isn't what it was tasked for as I keep repeating.

It's also a matter of fairness to LDCs. Most likely, poor countries aren't contributing to the IMF so that their funds will be used to bail out rich countries suffering not from BOP problems but from fiscal ones. So, not only is it a misallocation of funds, but also a miscarriage of global governance. By all means, let the Europeans help out one of their own--but without IMF funds.

The world is an unfair place, but it was like that long before I got here.

IMF on Expanding Special Drawing Rights' Int'l Role

In March of 2009, People's Bank of China Governor famously made his "Reform the International Monetary System" speech. Until now, we still do not have a clear reason why he made this speech. A Chinese colleague suggested it was to appease Chinese politicians who had grown tired of the export lobby's continuing predominance in policy circles. (No, the Communist Party is not monolithic.) In any event, Zhou reiterated the Chinese view that the United States' exorbitant privilege of issuing the world's standard reserve currency allowed it to abuse the aforementioned system. The United States, in effect, gave in to the temptation to flood the world economy with uncontrolled dollar emissions. His suggestions were many, including broadening the world's reserve currencies to reflect the shifting global balance of economic power. Among other things, expanding the role of the IMF's special drawing rights (SDRs)--a form of currency serving as money only within Bretton Woods institutions--to encompass trade and reserve accumulation functions was mooted by Zhou.

Lost in the piles of post-worthy material I have accumulated (apologies) is a recent IMF paper that assesses whether expanding the role of SDRs would improve the stability of the international system. My quick read? Yes, it may, but there are significant political hurdles along the way that need to be surmounted. What follows is the overview of the paper; the rest is well-worth reading especially for IPE junkies, global imbalance addicts, and other sorts with obsessive-compulsive tendencies. Enjoy?
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Overview

- The SDR has enjoyed renewed attention lately in the context of debates on international monetary reform. To be sure, the term SDR has been used to refer to three different concepts—(i) a composite reserve asset created in 1969: the “official SDR” as defined in the Fund’s Articles; (ii) a potential new class of reserve assets: tradable SDR-denominated securities issued by the Fund or an investment vehicle backed by a subset of the Fund’s membership; and (iii) a unit of account, which could be used to price internationally traded assets (e.g., sovereign bonds) and goods (e.g., commodities), to peg currencies, and to report balance of payments data. All three are discussed here.

- In these different roles, the SDR might help serve respectively the following objectives: reducing the extent and costs of international reserve accumulation; augmenting the supply of safe global assets and facilitating diversification; and reducing the impact of exchange rate volatility among major currencies. Expanding the SDR basket to major emerging market currencies presents trade-offs, but could further support these objectives.

- In order to make a difference in any of these areas, the role played by the SDR would need to be enhanced considerably from its current insignificant level. Very significant practical, political, and legal hurdles would need to be overcome in the process. Given the potential benefits however, experimental steps along the lines outlined here could be considered in the years ahead. In this spirit, the paper open-mindedly puts forward a broad range of options for debate. As the international community comes to a firmer view on the SDR’s potential role, the most promising options could be assessed further.

- Clearly, problems in the international monetary system (IMS)—persistent global imbalances, large and volatile capital flows, exchange rate gyrations disconnected from fundamentals, insufficient supply of safe global assets—are complex and call for an array of remedies—global policy collaboration and stronger surveillance, enhanced systemic financial safety net, financial deepening in emerging markets and more generally development of new reserve assets. The issue is whether there is a helpful role to play for the SDR amid these solutions. This paper suggests there might be.

Reform Interruptus: IMF Kudos for Pre-Crisis Libya

This post is a follow-up to one I have just made on the reformist direction Libya was headed prior to the present crisis. In no small part due to Saif al-Islam Qadhafi's prodding, there were indications that the state was indeed normalizing itself as a market-based economy.

From the last (meaning previous, one hopes) Article IV IMF consultation dated 9 February 2011, we gather a number of interesting factoids:

An ambitious program to privatize banks and develop the nascent financial sector is underway. Banks have been partially privatized, interest rates decontrolled, and competition encouraged. Ongoing efforts to restructure and modernize the CBL are underway with assistance from the Fund. Capital and financial markets, however, are still underdeveloped with a very limited role in the economy. There are no markets for government or private debt and the foreign exchange market is small.

Structural reforms in other areas have progressed. The passing in early 2010 of a number of far- reaching laws bodes well for fostering private sector development and attracting foreign direct investment. The success of the new laws, however, hinges on promoting inter-agency coordination and open consultation with the legal and business communities, and establishing permanent bodies to monitor, assess, and oversee implementation. A comprehensive civil service reform is needed to facilitate more effective wage and employment policies that would address the needs of a young and growing labor force.

Recent developments in neighboring Egypt and Tunisia have had limited economic impact on Libya so far [sure...whatever]. To counter the impact of higher global food prices, the government abolished, on January 16, taxes and custom duties on locally-produced and imported food products. Later in January, the government also announced the creation of a large multi-billion dollar fund for investment and local development that will focus on providing housing for the growing population.

Call it Bretton Woods postcards from the edge. So the IMF observed two trends it welcomed in moving away from reliance on oil revenues for growth and towards private sector employment to provide work to a young population. I guess the speed at which it had moved towards both has not proven to be fast enough to outrace regional events:

Executive Directors agreed with the thrust of the staff appraisal. They welcomed Libya’s strong macroeconomic performance and the progress on enhancing the role of the private sector and supporting growth in the non-oil economy. The fiscal and external balances remain in substantial surplus and are expected to strengthen further over the medium term, and the outlook for Libya’s economy remains favorable. Directors saw as the main challenges the need to provide employment opportunities for a young and growing labor force, and the steadfast implementation of reforms to diversify the economy and reduce the high dependence on oil revenue.

The entire text is not very long and is well worth reading for a glimpse of the Libya just before tumult engulfed the Gulf. The dry text aside, you can see why even the Washington-based pooh-bahs welcomed the direction it was heading. Again, how would you have helped normalize global relations with a pariah state but through commercial exchanges? The Qadhafi clan's siege mentality to recent events is a regrettable regression, though recent indications suggested that Libya was indeed headed in a different direction. Go ask the IMF.

Critics of those who sought to de-isolate Libya should remember that. To paraphrase a certain commercial, this was becoming less and less Moammar's country.

Indonesia Mounts Its Defence in Int'l Currency War

Just a little over a decade ago, Indonesia was the epicentre of the Asian financial crisis. In a matter of months, the local currency, the Indonesian rupiah (IDR), had lost eighty percent of its value as foreign investors fled the country as quickly as they came. After all, they call it "hot money" for a good reason. Amidst all this were food riots, race riots, and various separatist movements trying to take advantage of the seeming loss of control by the central government. By 1998, harsh IMF conditionalities had helped ease out the long-running Suharto regime.

But that was then and this is now. The--how should I describe them--flatulent fiscal and monetary policies of the Americans, currency warriors extraordinaire, now threaten to overwhelm Indonesia's financial stability. Like in so many other countries in the region, the nearly unlimited ammunition the Yanks threaten to use causes asset bubbles, inflation, and a diminution of export performance.

And so it has come to pass that our Indonesian colleagues have sounded the warning bells. While not slapping capital controls per se, there has been considerable use of macroprudential measures such as increasing reserve requirements. It should be noted that the Chinese use a lot of this tinkering as well:

Indonesia said it will tighten rules on banks’ foreign-exchange holdings and overseas borrowing to cope with capital inflows that have pushed up inflation and strengthened the rupiah this year. Bank Indonesia will also reintroduce a 30 percent cap on lenders’ short-term overseas borrowing to minimize the risk of sudden capital outflows, it said yesterday. Banks must set aside 5 percent of their total foreign-exchange holdings as reserves as of March 2011, from 1 percent currently, Deputy Governor Budi Mulya said at a press briefing in Jakarta yesterday. The reserve requirement will rise to 8 percent effective June.

“These rules will ease pressure on the rupiah,” said Anton Gunawan, chief economist at Jakarta-based PT Bank Danamon Indonesia. “The central bank wants to absorb excess liquidity in the banking system.” Indonesia and its peers are grappling with increasing capital inflows as borrowing costs and growth rates that are higher than those of developed economies boost the appeal of emerging-market assets. Taiwan tightened curbs on exchange-rate derivatives this week and South Korea plans similar measures, according to an official at the country’s financial regulator...

Bank Indonesia has resisted imposing capital controls or raising its benchmark interest rate from a record-low 6.5 percent, choosing instead to increase bank reserve requirements and encourage investors to keep their money in the country for longer periods. The current benchmark rate is consistent with Indonesia’s goal of achieving inflation of 4 percent to 6 percent in 2011 and 3.5 percent to 5.5 percent in 2012, Mulya said yesterday.

The higher foreign-exchange reserve ratios may absorb as much as $3 billion in excess liquidity, and are “prudent banking” measures aimed at helping Southeast Asia’s largest economy cope with capital inflows, Mulya said. “If money is pulled into the reserve requirement then it cannot circulate within the system,” said Purbaya Yudhi Sadewa, an economist at PT Danareksa Research Institute in Jakarta. “That’s a disincentive to avoid banks attracting too much dollar since they must pay interest on that dollar whereas the money is put away at Bank Indonesia, which may not even earn interest.”

Lenders will be required to limit their short-term overseas borrowing to no more than 30 percent of their capital starting in January, the central bank said. The rule aims to encourage a shift to long-term foreign borrowing and reduce the risk of sudden reversals in capital flows, it said. The requirement was scrapped in 2008 because of the global financial crisis...

Five state-owned Indonesian financial institutions, including PT Bank Mandiri, have given their commitment to buy back bonds to ease the impact of sudden capital outflows during a crisis, Agus Suprijanto, acting head of fiscal policy at the Finance Ministry, said this week. The government is still in talks over the use of their funds and will prioritize funding from the state budget for any buybacks, he added.

Indonesia will also require lenders with assets of at least 10 trillion rupiah ($1 billion) to announce their prime lending rates, effective in March 2011. This rule will push banks to decrease their net interest margin and become more efficient, the central bank said. Lending growth may reach 22 percent this year, it said.

Bridging the Asian financial crisis era of foreign exchange pouring out and today's Indonesia with money pouring in, keep in mind that former Indonesian Finance Minister Sri Mulyani Indrawati has become a managing director at the World Bank for her widely praised efforts to stabilize Indonesia's economy post-financial crisis. Aside from reining in foreign short-term borrowing, she also did much to address the pervase corruption of the Suharto era. We wish our fellow Southeast Asians all the best, and I guess it's better to have problems dealing with excessive foreign exchange inflows instead of the opposite, right?